Daily Flog: The worm turns . . . yet another profit

September 24, 2008

After feasting on Wall Street’s collapse, hedge hog John Paulson scurries to London for more.

The early worm kills the birds — excuse me, we’re talking of the financial world, so the birds are actually vultures.

And the worm is New Yorker John Paulson (left), the hedge-fund manipulator so admired in his circles.

Not as well-known as he should be to the rest of us, Paulson has fortunately surfaced into the news.

Hedge hog or worm — like a Fox, we report, you decide.

He’s a different animal to those who worship short-sellers. Paulson’s so admired that after Alan Greenspan sold us short, Wall Street’s Rasputin went to work for Paulson. As the Financial Timesnoted last January:

Alan Greenspan, the former chairman of the US Federal Reserve, is to become an adviser to Paulson & Co, the $28bn New York-based hedge fund company that achieved spectacular investment returns at the height of the credit squeeze last year.

Mr Greenspan will join the advisory board of the credit specialist investment house. Paulson will be the only hedge fund that Mr Greenspan will work with under the terms of the agreement.

Let’s let Bloomberg — the news service owned by Mayor Mike Bloomberg — tell this latest story of Paulson’s maneuvers after some counsel from his aging bitch Greenspan (as if Paulson really needed help).

The mayor, of course, has only indirectly helped people like John Paulson. Mayor Mike did nothing with his vast business knowledge to stop the damaging Wall Street derailments even though his company’s sophisticated financial-data products that gave the mayor his fortune enabled Wall Street to figure out how to profit from subprime mortgages, credit arbitrage, and the like (as I pointed out yesterday).

Paulson & Co., whose main hedge fund made a sixfold return last year betting on a collapse in U.S. subprime mortgages, said it’s wagering four of the U.K.’s five largest financial-services stocks will decline.

Everybody’s talking these days about Hank Paulson, whom Jon Stewart refers to as the Frankensteinish figure who’s spending your money to bail out Wall Street’s reckless financiers — who crapped out after playing with the billions you had already handed over to them.

Hank Paulson worked as Nixon flunky John Ehrlichman‘s assistant during the Watergate era and then made his money at Goldman Sachs, eventually becoming its CEO before his appointment as Dick Cheney‘s Treasury Secretary. (Paulson’s official bio notes that not only is he an “avid nature lover” but that Goldman Sachs is “one of the world’s largest and most successful investment banks.” Make that “former investment bank.”)

John Paulson, on the other hand, never worked for Nixon and he hasn’t yet made enough money; he’s straight out of Dune or Tremors: the giant worm too greedy to ever get his fill after making sneak attacks on his prey.

But John Paulson’s not such a bad thing, if you believe his press releases. The final chapters of the Mike Bloomberg story — bailout czar? president? — have yet to be written, but the mayor’s Bloomberg L.P. news service continues the story of John Paulson:

The disclosures [by Paulson & Co.] were required under rules pushed through by the U.K.’s Financial Services Authority last week. John Paulson, founder of the $35 billion hedge fund, in June said banks will need to write down about $1.3 trillion from the subprime crisis after more than $522 billion in losses and writedowns so far.

“Paulson & Co. empathizes with financial firms as to the difficult positions in which many find themselves,” Paulson & Co. said in a statement distributed by PRNewswire. “We support the FSA’s desire to establish fair trading practices and to eliminate fraud and market manipulation. We will continue to comply with the FSA’s requirements.”

The FSA’s emergency measures were introduced after politicians and some investors blamed short sellers for a plunge in HBOS’s market value last week before it agreed to a takeover by Lloyds TSB. Under the rules, no new short positions can be taken in U.K.-listed financial services companies. While existing short positions don’t have to be closed, they can’t be increased.

If we were playing a word-association game and you said “John Paulson,” we’d say “rich.” Paulson, after all, is the hedge-fund honcho who reaped $3 billion — $3 billion! — shorting the mortgage market.

But rich wasn’t among the adjectives recently used by a Canadian judge used to describe the New York hedge-fund manager’s 2006 testimony in a Calgary courtroom. Instead, she used these choice words: “unpersuasive,” “self-serving,” “unbelievable.” In sum, she said, “Mr. Paulson was not a credible witness.”

He wound up in the Canadian court after some complex maneuvering in the arbitrage bidness:

Before Paulson was a Wall Street Journal pinup idol, he was just another hedge-fund manager trying to eke out a living. His strategy: event arbitrage, or betting on such corporate events as mergers, restructuring and spinoffs. In 2005, he saw an opportunity to profit when French oil giant Total bid for Deer Creek Energy.

Total bid $31 a share, or $270 million, for Deer Creek, an oil-sands play based in Calgary and backed by Connecticut private-equity firm Lime Rock Partners (which, as an aside, made a bundle on the deal). Paulson refused to tender his stake, arguing that fair value for the company was as high as $190 a share. He sued in Canada to prove that point, exercising his so-called dissenter’s rights to seek a higher price from a court.

On June 13, the Honourable Madam Justice B.E.C. Romaine of the Court of Queen’s Bench of Alberta ruled that Total paid fair value for Deer Creek, quashing Paulson’s claim. The 130-page opinion, issued more than a year-and-a-half after the trial, contains insights into corporate governance and valuation methodologies. . . .

Justice Romaine didn’t buy Paulson’s testimony, calling him a “not credible” witness and implying that he was essentially trying to greenmail the company. His valuation methodology was “unpersuasive in someone of his credentials and level of financial sophistication.” His selective judgment of risk in an oil-sands company was “self-serving.” And as a minority shareholder, Paulson’s “limited and skewed interpretation” of Total’s intention to buy the whole company was “self-serving and patently erroneous.”

You don’t have to go to Canada to learn more about Paulson. Just drive out to the Hamptons. That’s what Vanity Fair‘s Michael Shnayerson did for his story last month, “Hamptons Overdrive”:

While much of America worries about foreclosure, John Paulson, who made $3.7 billion shorting subprime mortgages, has plunked down $41.3 million for a Southampton estate. Another just went (to Tiger Woods?) for $60 million. And Blackstone’s Stephen Schwarzman is building a vast compound in Water Mill. But, amid whispers about which Wall Street casualties will lose their summer spreads, the market for properties below $10 million is grim.

I guess that means I should try to hang onto my house and just hope that John Paulson doesn’t get his hands on my mortgage contract.